Official Report on the 2008 Financial Meltdown

Will Fiat Currency Ever Go Away?

[The Hub Page monitor said my answer to Ross' question was too long and I needed to make a hub of it or shorten it; I did both. My apologies for what end up being somewhat long-winded, technically-oriented hubs. I think it is a result of my desire to educate ... often myself, but also anyone else who might have the interest. I find I need to research most things I write about now since I am well past the brashness of youth where I was certain of my facts. Too often, my memory has made a fool of me and unfortunately my readers must suffer the consequences by wading through numbers and statistics and long explanations, those that stick with me anyway as I hope you do.- My Esoteric]

I had researched this subject years ago but went back for some quick refresher. I don't think anybody is advocating going back in time when trade was done in the actual metal; that, I believe, would be a physical impossibility. So, what the proposal is, is to go back to the Austrian school of thought which is to use the gold standard once more.

The form that took was the Bretton Woods system that began in 1945 where the value of the dollar was pegged at 1/35 of a troy ounce of gold, regardless of what the market price of gold really was, and then all other currencies were fixed relative to the dollar. In effect, the U.S. promised to redeem the dollars they held in real gold at the rate of $35 per troy ounce; should they wish to do so. As a result, relative value between currencies did not fluctuate with changes in the market.

Unfortunately, this only works when inflation is steady. Starting in the late 1960s, with the Vietnam War and then the Oil crises, America was forced to print money which caused inflation to start climbing. America ended up not having enough gold reserves to honor it's commitments. So what did President Nixon do? He unilaterally broke our promise and untied the dollar from gold. As a consequence, once again America had a true fiat currency.

History has since shown that if you have a strong central bank that is quasi-independent from the politicians, as Americas is, fiat currency works fine. When it isn't, like in the Wiemar Republic in the 1930s or Argentina in 1989, it is disaster in the making. Having the capability to print money in the governments hands is not, in and of itself evil. Just like many people believe owning a gun is not dangerous, per se. It is what you do with that power. Like with anything else, if you use that power responsibly, it works, if you don't, it doesn't. We can find examples throughout history where each type of economic system has failed and led to economic collapse and hyperinflation. We are using the current system of fiat currency because all of the systems based on using species of one sort or another or barter ultimately failed.

Also, everything is cyclical. Using the GOX index for gold over the last 14 years or so, in nominal dollars it sank from a high of $140 a share in 1996 when the effects of the Bush-Clinton tax increases were being felt on the deficit and good times were beginning, to a low of $30 per share in 2000, just before 9/11 and the war on terrorism, the war in Iraq, and the war in Afghanistan. It climbed steadily until 2005 and then leveled off before a steep increase in 2007 when the first signs of economic collapse were being noticed. It topped out at $220 per share.

Then came the recession when you expect a huge increase in gold prices. I don't have a good reason for what followed. It might be the election of the Democrats to the Presidency and Congress with the expectation of stability or the ending of the Iraq war, but from early 2008 to late 2008 the price of gold plummeted and the value of the index that it follows it fell as well, down to $70 per share! Since then, of course, reality has set in and the price of gold has sky-rocketed to somewhere around $1,400 a troy ounce and the index is now $252 per share.

So, what will happen to the price of gold when the world economy stabilizes and things improve again? It will plummet as it has always done once people feel somewhat safe again. So, long story not so short, I don't suspect fiat currency to ever disappear.

GOX Gold Index | Source

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Comments 8 comments

Wow! What a response. Thank you for taking the time to write such a well thought out answer to my question. I have to say, I agree with you when you say that you don't expect fiat money to ever fully disappear. One thing is for certain though; money has to stop being printed like there is now tomorrow!

ambitous1 5 years ago

I dis-agree with the moderator and I am of the belief that if you are backing up your hub with factual knowledge, let it go long. I do have one question/comment on a comparitve note you made. You said "Just like many people believe owning a gun is not dangerous, per se" do you feel not anyone should own a gun at all? Fire arms in general are not dangerous it is the people that own them that are the danger. You should do a hub on owning weapons, I would love to hear your opinoin on this topic.

My Esoteric 5 years ago from Keystone Heights, FL Author

Thank you Ambitous1. I do believe, as a matter of theory, that guns, nuclear bombs, or most other items are not intrinsically dangerous. Exceptions might be liquid nitroglycerin. But I am a big believer in regulation. I appreciate the idea for the hub, it hadn't occurred to me yet. I will.

DrMikeFitzpatrick 5 years ago from Sandpoint, Idaho

You likely know the US dollar is the longest running fiat currency in history. you may not know it was announced (you can find it on youtube) about 4 years ago the "Amero" would replace the dollar, at 4-1. whether the ratio remains true or not, every time a currency changes, the transfer of wealth is huge for the bankers. no matter what the form of money, whether it is gold backed or not too, if it is "lent" into existance, it is doomed to fail. it becomes mathematically impossible to pay off the debts of its use. you may want to read Ed Griffins, The Creature From Jekyll Island. the worlds foremost historian on the federal reserve. truth is stranger than fiction. good post, great questions, tx, Dr. Mike

My Esoteric 5 years ago from Keystone Heights, FL Author

Dr. Mike, thank you for your comments, been awhile since anyone has read this hub. You are the second person to refer to Jekyll Island, I will look it up.

As to the "Amero". boy have I been asleep at the switch; never heard a word about it. I just Wikipedia'd (the new Googled) it and found all sorts of things I hadn't been aware of including the fact that in 2007 that 43 Conservative and Libertarian House Representatives submitted a "Sense of the Congress" bill that the United States should not enter into a North American Union with Canada and Mexico for which the Amero would apparently be its currency. The things you learn on HubPages.

The last that has supposedly been heard about this is in 2008 when a blogger named Hal Turner, an white nationalist, Holocaust denier, featured what he claimed to be genuine Amero notes (paper currency) that had been secretly produced by the US, Canada, and Mexico.

Snopes.com, of course, says the Amero is just Urband Ledgend while Amerocurrency.com strongly disagrees, although for the life of me, I can't tell if they are for or against it.

DrMikeFitzpatrick 5 years ago from Sandpoint, Idaho

it is a great book for sure, Ed is a personal friend and a good man, and a great writer. it is great to celebrate ones literacy. :) i was an associate of aaron russo who directed "from freedom to facism", and spoke to him just before he died, mysteriously i might add. he has an interesting 11 minute video on youtube featuring a conversation with Nick Rockefeller a bit before 9/11/2001. after listening to that, you may start to think differently about our leaders and our lives. the news is no place to get news. keep up the great work! Dr. Mike

My Esoteric 5 years ago from Keystone Heights, FL Author

Dr. Mike, I just read what Wikipedia has to say about Ed Griffin; I recognize many of the ideas he has advocated as well as the organizations he has and does belong to; can't say that I will be agreeing with much of them starting with the JBS. When I was in high school, where I was first taught about the rather non-magical "Mandrake" effect, I was a strong Goldwater supporter; however, the John Birch Society was way too far right for my tastes, even then. Can you imagine where they stand now, lol.

I have a better understanding of the Federal Reserve System than the average bear and know what the negative impact on the economy the lack of one can have as well as just a negative impact it can have when it exists but it doesn't function as designed; the 2008 Bush-Greenspan Recession is a prime example. Having done quite a bit of research into this debacle now, I have no doubt in mind that if Greenspan specifically had acted responsibly, rather than politically, the major impact of the recession could have been avoided. He, above all others at the time, had the power and the authority to have reigned in the forces (the financial, not just banking, institutions) that were ultimately responsible for the dibilitating nature of this particular recession.

DrMikeFitzpatrick 5 years ago from Sandpoint, Idaho

i appreciate your insightful comments of recent history for sure. what i like abut ed's book, it still is recognized as the historian view of the creation of the federal reserve. down to the quotes of former pres wilson on his death bed about what he did an allowed. thomas jefferson wrote about it over a 100 years in advance. thanks for the response, Dr. Mike